In Washington, US Secretary of Agriculture Tom Vilsack and Navy Secretary Ray Mabus unveiled the “Farm to Fleet” program, through which the Navy will begin to add biofuels into its regular domestic purchases of approximately 77 million gallons of jet fuel (JP-5) and marine diesel (F-76) each year.

Initial fuel contracts will be awarded in 2015, with initial RFPs commencing in spring 2014 and first deliveries scheduled for mid-year 2015. The fuels will contain biofuels blends of between 10 and 50 percent.

“The Navy’s intensifying efforts to use advanced, homegrown fuels to power our military benefits both America’s national security and our rural communities,” said Vilsack. “Not only will production of these fuels create jobs in rural America, they’re cost effective for our military, which is the biggest consumer of petroleum in the nation.”

Farm-to-Fleet builds on the USDA / U.S. Navy partnership inaugurated in 2010, when President Barack Obama challenged his Secretaries of Agriculture, Energy and Navy to investigate how they could work together to speed the development of domestic, competitively-priced “drop-in” diesel and jet fuel substitutes.

“A secure, domestically-produced energy source is very important to our national security,” said Navy Secretary Mabus. “Energy is how our naval forces are able to provide presence around the world. Energy is what gets them there and keeps them there. The Farm-to-Fleet initiative we are announcing today is important to advancing a commercial market for advanced biofuel, which will give us an alternative fuel source and help lessen our dependence on foreign oil.

“When fossil fuel prices spike because of world crises, we have to cut back on operational costs to pay higher costs for fuels. When prices spike, we steam less, and train less and neither is a good option. We have to have a stable, domestic source of energy for the Navy.”

“The Navy is open for business,” said Assistant Secretary of the Navy for Energy, Installations and Environment, Vice Admiral Dennis McGinn (USN, Ret.).

The Farm to Fleet program at a glance

All fuels purchased will be price competitive with conventional fossil fuels, and will be purchased in annual one-year contracts by the Defense Logistics Agency Energy. The RFP will be open to all companies, worldwide. All fuels will be in-spec, drop-in replacements for conventional fossil fuels.

“We are not going to pay a premium,” said McGinn, “but we are going to expand the types of liquid fuels that the Navy is going to use. By reducing our dependence on a single fuel source, in the long-term we are going to protect the Navy from price volatility and increase our combat effectiveness. “Individual bidding companies will be able to determine, based on their own costs and capacities, how much of a biofuels component to include — between a minimum of 10 percent and a maximum of 50 percent.

Companies will choose to bid on JP-5 jet fuel and F-76 marine diesel (or both), at their discretion, and the Navy has said that it will be fuel agnostic in its contracting — that is, based on market forces it may take more F-76 marine diesel or more JP-5 jet fuel.”We are giving a long-term market signal,” noted McGinn, “to give more market certainty that the Navy and DOD are in this for the long-haul.”

[For newer readers, the military uses slightly different versions of jet fuel and marine diesel. It’s fuels are generally less volatile fuel than conventional fuels, with a higher “flash point” that were established because of the harsh conditions that the military must operate under at sea. For this reason, the military cannot simply buy conventional marine diesel or jet fuel, whether it contains biofuels or not].

The Navy’s transition to biofuels: Testing and Certification

The Navy began testing aviation biofuels and marine biofuels on a ship-by-ship and jet-by-jet basis several years ago. Last summer, the Navy demonstrated a Green Strike Group operating on biofuels during the 2012 RIMPAC exercises.[RIMPAC is the world’s largest international maritime warfare exercise, held every two years out of Pearl Harbor, Hawaii, hosted by the US Pacific Fleet and featuring 22 nations and 42 ships in 2012, enhancing interoperability between Pacific Rim armed forces].

“It was at RIMPAC,” McGinn observed, “that we really got an end-to-end view on all the supply chain issues. Now, we are ready to deploy quickly. Now, it’s down to business. The intention now is to alert industry that we are open for business and that we are starting this program in a very realistic way.”

The Navy’s transition to biofuels: Capacity building and assurance of supply

Alongside the testing and certification efforts, the Navy, USDA and DOE had announced a program in 2012 to directly invest up to $510 million, through the DPA Title III office and Commodity Credit Corporation (CCC), in order to assure that capital would be available to build production capacity and offset feedstock costs for drop-in biofuels that would meet the Navy’s needs, timelines and cost goals.

[Note for newer readers: DOE and DOD’s portion goes to DPA Title III to build biorefineries, USDA’s portion is in CCC funds to address feedstock development.]

The Defense Production Act was passed during the Truman Administration to permit the Department of Defense to invest in building production capacity for a wide range of military materials. The Act was passed in recognition that the military, given the nature of its missions, is often the first large customer for a technology. Chicken-and-egg situations can arise where production capacity (for economies of scale) proves impossible to finance for first-of-kind technologies developed by young technology firms. Currently, the DoD supports the development of two dozen technologies through DPA.

Though the bulk of the DOE’s share of funds have yet to materialize the Navy has established a two-track investment program in building capacity. In May and June 2013, the DoD announced that it would award four contracts totaling $20.1 million to Emerald Biofuels, Natures BioReserve, Fulcrum Biofuels, and Red Rock Biofuels forPhase 1 of the DPA Title III Avanced Drop-in Biofuels Production Project, which includes front end engineering and designing, permitting, and development of detailed business cases.

[Note to newer readers: DOE invested the first $5 million that got the program office underway]

Under the grants, the companies will develop plans for up to 170 million gallons of total capacity between the four biorefineries that will produce drop-in biofuels at a cost of less than $4 per gallon. The biorefineries are expected to supply aviation and marine diesel fuel. The grants will be matched by $22.6 million in investments by the companies, which have proposed making biofuels primarily from fats, oils, and greases as well as municipal solid waste and woody biomass..

A second phase, which would be funded out of FY 2013 and later year funds, would award additional contracts for construction and commissioning of one or more biorefineries capable of providing the US military with sufficient sub-$4 renewable fuels to meet its Great Green Fleet and alternative energy goals.

USDA’s price support

In an innovative program, the USDA will make available up to $161 million in Commodity Credit Corporation (CCC) funds — in support for the Navy’s fuel program. The USDA’s support was originally announced by the Administration in 2012. The CCC is a wholly-owned government corporation created in 1933 to “stabilize, support, and protect farm income and prices”.

Under the USDA component of the program, for fuel solicitations in coming years the Navy will be able to access the CCC funds to buy down the cost of the biofuels component of any fuel purchase (using CCC-qualified, domestic US feedstocks), that is above the current price of fuel paid by the Navy.

For example, if the DLA receives a bid for 50 million gallons of military spec (JP-5) jet fuel with a 20 percent biofuels component, in a qualifying year and using CCC-qualified feedstocks, that is 10 cents per gallon above the price that the Navy pays for conventional fuels, then the CCC funds can be “tapped” by the Navy to make up the difference of $5 million in the cost difference between a conventional fuel buy and the green fuels buy.

US Navy to pay the “going rate” for conventional fuels

In this way, the Navy is assured of paying only the going rate for conventional fuels as it makes its transition to a more energy-secure, diversified fuel base.

Having established an assurance of supply with its DPA program, the Navy has established this program to make sure it can obtain fuels from a much wider set of suppliers — ensuring that it has the best chance of eliminating the delta between the cost of conventional fuels and military-spec biofuels as quickly as possible.

In another example, if the DLA receives two bids — both at the same price, but one containing a 30% biofuels blend and one containing a 10% blend, the higher biofuels blend will be selected.

The Navy has a long tradition of conversion of its energy sources — from sail to coal, coal to oil, and the introduction of its nuclear program.

“In every case, it was never done all at one time,” said McGinn. “If you look at photographs of our ships in the 1800s, you’ll find many cases of ships carrying both sails and steam, together. The original hybrid, really. And in every case it was a matter of replacing one ship at a time, and the transition was gradual. We had some diesel-powered submarines for some time after the first nuclear submarine was delivered, and for some time we had a mix of carriers after the first nuclear carrier (the USS Enterprise) was delivered.

Fuel deliveries

The first deliveries under the Farm to Fleet program are 330 million gallons (with a minimum biofuels component of 33 million gallons) scheduled for the Inland/East/Gulf Coast fuel procurement region — which includes the Eastern US as well as Guantanamo Bay. These contracts are expected to be issued as of April 2015.

The second deliveries under the program are 370 million gallons (with a minimum biofuels component of 37 million gallons) scheduled for the Rocky Mountain / West Coast region. These contracts are expected to be issued as of June 2015.

DLA Energy is expected to have two solicitations in 2014, in spring and summer.

US Navy’s Industry Day

To provide more details about the program and network with prospective suppliers, the Navy will hold an Industry Day in Washington DC on January 30th, scheduled to follow the annual meeting (Jan 28-29) of CAAFI (the Commercial Aviation Alternative Fuel Initiative).

The Navy’s Great Green Fleet

In 2016, the Navy will deploy its Great Green Fleet — these ships will employ either a minimum of three Energy Conservation Measures (ECMNs) on board, or will utilize biofuels blends. The specific ship designations — and whether they will operate jointly on an ongoing basis or will be assigned on a mission-by-mission basis will be determined closer to 2016 deployment date by the Navy. Operations could include, for example, a group operating at the PACRIM exercises, or assigned to duty in the Mediterranean, or a group operating in the Caribbean on anti-drug patrols.

Long-term

In the longer term, the Navy plans to expand this program into a global solicitation that will provide blends of up to 50 percent biofuels for its Atlantic Mediterranean and Western Pacific fuel needs.

“Certainly this will happen,” said McGinn, “although the timing will be based on market forces. However, a lot of other nations are equally interested in creating alternatives for their energy supply, and we’ve had discussions with a variety of them, as well as our agreement with the Royal Australian Navy.”

Industry reaction

“We applaud USDA’s and the Navy’s commitment to the nation’s energy security which is essential to our military readiness,” said BIO EVP Brent Erickson, head of the association’s Industrual & Enviromental Section. “We also applaud their recognition that biofuels are a critical part of the equation. With the military’s leadership helping create demand for advanced biofuels, private biotech companies and rural America will answer the call. Development of these advanced aviation fuels will not only contribute to our national defense it will have environmental and cost benefits for American consumers as well. The Navy’s announcement today is another step in the right direction.”

The Bottom Line

As Assistant Secretary McGinn puts it, the Navy’ is “open for business.”

More importantly, it has established a dual track program to Assure supply (call that Plan A), and obtain Best prices (call that Plan B).

In this latest “Plan B” component, it has found a conservative, realistic path to changing fuels gradually over time, while ensuring that it is on track to meeting its stated 2020 transition goals — and leaving itself open to achieving its goals far faster than 2020 should the markets provide sufficient biofuels at competitive prices with conventional fuel.

In the end, this is a matrix opportunity for fuel developers. Each will be able to determine, based on their individual production capacities, which yearly contracts to bid for, and how much of a biofuels component to add.

For example, a company with a production capacity to make 10 million gallons of biofuels, at a $0.50 premium over the cost of conventional fuels, could construct a bid for up to 100 million gallons of a 10-percent biofuels blend at a nickel premium to conventional fuels. If this is a winning bid based on the competitive solicitation by DLA Energy, the USDA funds would be available to “buy down” the $5 million differential for the first three years of the Navy’s program.

In future years, the bid would have to match conventional fuel prices without reliance on USDA support. In this way, the industry can scale up gradually, as the Navy scales its fuel demand gradually, while providing a consistent market signal and assuring the Navy that it pays only the going rate for fuels during the transition period.

Another interesting feature of the program? Since these are fuel blends, there could be a variety of scenarios in terms of the identity of the bidder. It could be that biofuels producers make bids directly, and source conventional fuels to make blends. It could be that conventional fuel producers, or middlemen, make buys from biofuels producers and create their own bids.

Some may critique the fact that DLA Energy is buying in one-year contracts — biofuels producers have long noted that long-term contracts are essential to financing biofuels at scale. Presumably, the Digest notes, those firms that needed to access Navy contracts because of capital concerns would have robustly competed for DPA Title II funding.

Those, on the other hand, that are looking for financeable offtake contracts from, well, the most credit-worthy customer out there — here’s the opportunity.

Without a question, the Navy has given itself an assurance of supply — and with this program, will be unleashing market forces to ensure that it can access fuels from the wide variety of companies now reaching commercial scale, or on the cusp of doing so.